The monthly annual CPI for August is a bit like the old story of the Curate’s Egg with some parts good and some parts bad. We can see that in the difference between the headline (bad) and underlying (good) inflation rates.
Latest monthly inflation data saw Australia’s headline inflation rate lift to 5.2% in August, up from 4.9% in July, offering a little shock to the economic system. However, underlying annual inflation excluding volatile items was better, declining from 5.8% in July to 5.5% in August.
Though the Australian economy is clearly ‘easing’ back toward normal or standard conditions, the big question is whether that is happening at a rate quick enough to reduce inflationary pressures. Addressing that question, The Guardian’s Greg Jericho suggested the inflation numbers were demonstrably tracking the US, but are at least for now, residing higher than the US.
All the main indices are pointing down, as the Capital Cities chart shows, but are they heading down at the right pace?
When we examine the inflation rate, we need to look beyond the headline rate and delve into where the contributions to general price increases are coming from.
The chart here provides some pretty clear clues that the usual suspects are prominent and most of the impact is being felt at the household level – which is expected given the measure we are examining is the consumer price index.
Automotive fuel experienced the largest price increases over the quarter. The ABS reported that:
“…the annual movement for Automotive fuel remains volatile, partly reflecting price changes from 12 months ago, when Automotive fuel prices fell 11.5 per cent in August 2022. Price rises this month, combined with base effects, have seen the annual movement for Automotive fuel increase 13.9 per cent in August, compared to a fall of 7.6 per cent in July.”
Given most of our fuel is imported, this commodity will remain volatile as international factors such as the Ukraine war and the recent OPEC curtailing of production flow through.
Of more concern will be the ‘essential’ characteristics of the other price increase contributors, such as Utilities, Food and Rents. It is however important to note that the electricity and gas increases, although high, were tempered by the rebates from the Energy Bill Relief Fund introduced in most cities from July, for eligible households. When prices are likely to head too far north, there are policy responses available, at least in some areas.
In the housing sector, it was pleasing to see a continued easing of the costs of new dwellings, as the chart below demonstrates.
New dwelling prices rose 4.8%, which is the lowest annual rise since August 2021, as building material price increases continued to ease, reflecting improved supply conditions. By contrast, Rent prices rose 7.8%in the 12 months to August, up from 7.6% in July, as the rental market remains tight.
It might be hoped over time that the reduction in new building costs will flow through to increased rental stock being built. We can but hope!
Meantime, the slowing economy, even with its higher prices, looks like it could use some relief right now, especially as so much – but not all – of the latest inflation data is being driven by factors external to the domestic economy.
